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Think Debt Can’t Bury You? Think Again

Just a few years ago when Melody Brooke applied for credit in anticipation of co-signing a loan for one of her adult children, she was told she had such good credit that she could buy a jet.

Today, she couldn’t buy a toy truck. The combination of a weak economy, which forced her to close her private counseling practice and caused her husband to lose a lucrative contract, has taken her family from a six-figure income to barely any income at all. To add to the constant barrage of debt collectors calling them, her husband hasn’t been able to obtain a job. “He’s only gotten two interviews and one offer,” says Brooke, who lives in the Dallas area with her husband. “But when they ran our credit, they told him they couldn’t hire him.”

The current financial crisis has brought about many economic anomalies, including throwing a whole new subset of the population on the radar of debt collectors – upper-middle class and affluent consumers like Brooke.

No More Easy Street

“We are seeing people who’ve never been down this road before” says Phill Hudson, a partner for the law firm of Arnstein & Lehr, with offices in Chicago, Ill., Milwaukee, WI., and throughout Florida. “Most people in this situation haven’t focused on what they’re facing, and the first thing we tell them is don’t ignore it and don’t become paralyzed.”

“Most people are in shock and they’re entering a world they’ve never dreamt of,” says Robert Markoff, president of the National Association of Retail Collection Attorneys, based in Washington, D.C. “The first thing consumers must do is talk to whoever is calling you.” Financial experts agree that speaking to debt collectors, especially in the early stages of delinquency, can go a long way in assisting a consumer’s cause.

According to Cena Valladolid, chief operating officer with Consumer Credit Counseling of Southern Nevada (CCCS), a non-profit organization that offers budget education, debt counseling, and elimination programs to consumers, talking to creditors can afford you an opportunity to become educated on special programs and repayment terms.

Part of honestly assessing your situation is looking at your assets that possibly can be sold such as a vacation home, timeshares, recreational vehicle, or non-essential vehicle. Also examine your savings, says Brooke. While she didn’t have anything with equity to sell, she used what small savings she had to settle three loans with a bank willing to work with what she could offer.

Don’t Panic

Perhaps just as bad as ignoring debt is getting into further trouble when trying to eliminate it. Sending all of your money to one creditor won’t make your problems go away, and can get you in deeper with other lenders. “People have a tendency to send the creditor who is making the most noise all of their money,” says Hudson, “but consumers need to make arrangements with all of their creditors.”

The priorities start with the essentials first, says Markoff. “It’s clear that you will need to provide shelter and food for yourself and your family,” says Markoff. “If you don’t have anything left, then you cannot work out plans.”

Markoff also advises consumers against falling into the trap of believing that if a payment plan cannot be worked out, an unsecured creditor can take their home or other property. “Generally, we don’t usually see a company taking property,” he says. If the problem seems overwhelming, he says, law firms that specialize in debt management and bankruptcy may be able to help consumers work with creditors.

“We eventually act as more than lawyers,” says Hudson of the services his firm offers. “We know the banks and lenders and the ins and outs of what they’re doing and accepting,” says Hudson. “Our clients may not always be happy about the options, but if we can get past the initial hurdle, we can help them move forward.”

Seek Extra Help

In addition to seeking paid counsel, there are also non-profit financial counseling alternatives. Services such as those offered by CCCS provide assistance with setting up budgets to accommodate precarious financial positions, and negotiating with creditors.

“Many creditors will reduce or eliminate penalties and interest,” says Valladolid. “We hope to put people in a situation to eventually help maintain or rebuild their credit.”

But, debtor beware. Valladolid cautions against companies that promise to help you immediately increase your credit score or rebuild your credit, or companies that offer to settle debts for very low amounts. “Anytime there is a public financial crisis with long-stretching arms, it always leaves room for scams,” says Valladolid. “I’ve heard of companies say they can eliminate debts up to 80 percent and settle them… we’ve never seen that here at CCCS.”

Additionally, Valladolid says legitimate non-profit credit counseling agencies will not charge a fee for their services. “We don’t charge because there’s nothing we do that the consumer cannot do for themselves for free, including negotiating settlements,” he says.

Markoff also cautions against companies that ask for fees in return for negotiating payment arrangements and settlements. “I see consumers daily who come to me saying they’ve sent all of their money to a company, and when they get sued they realize the company didn’t help them,” says Markoff.

When Should Bankruptcy Be Considered?

Before you consider bankruptcy as an option, speak with an attorney or credit counselor, says Markoff, as it might give you a different perspective. “If there’s a judgment entered, it doesn’t mean a person needs to file bankruptcy,” says Markoff. “It’s a black market on the credit, but the credit reports are already not looking good.”

Chatz says speaking to an expert in bankruptcy is a must. “There are different types of bankruptcy that are best for different people,” he explains. “And people need to realize that you cannot file bankruptcy on government debts such as IRS debts or student loans, as well as on child support debt.”

Markoff says if a bankruptcy isn’t right for you, more often than not, creditors will usually just sit on a judgment until the consumer’s situation improves, at which time, the consumer can then make arrangements for payments or settle the account.

“The most important thing to do is to not panic and focus on the future,” says Chatz. “Accept it and work through it. Things will turn around, they always do.”

For Brooke, she and her husband are still both seeking employment, as well as trying to take destiny into their own hands by starting another business. “We are launching an Internet business that uses his technical skill and the model I developed as a counselor and an author, but who knows how long that will take to go to fruition,” says Brooke. In the meantime, they move forward with credit lessons learned.